In gold meltdown a silver lining for economy

In line with the trend,India’s gold imports fell nearly 24% in the last quarter through March,and may drop at the same pace in April,market watchers say.

This — along with a decline in crude oil prices — augurs well for the Indian economy struggling to regain growth momentum and reduce the current account deficit (CAD) that hit a record 6.7% of the gross domestic product in the December quarter.

Gold imports are a significant reason behind the widening CAD.

The Indian tendency to invest in gold for its perceived safe-haven status has been a headache for policy-makers,who have rolled out a series of measures to boost financial savings in recent months. Alarmed by the languishing investments and slow growth in bank credit,the government has given a policy push to promote insurance and capital markets in recent Budget,while also using a newly-formed Cabinet committee to fast-track clearances for large infrastructure projects.

India,the world’s largest gold consumer,raised the import duty on the precious metal to 6% from 4% earlier in January,an effective six-fold hike in the duty in around a year,to contain the runaway CAD. A sharp depreciation of the rupee has added to the growing discomfort of the high CAD.

However,some analysts fear that the slump in prices may attract domestic buyers who have so far deferred purchases due to elevated prices.

“The slump in gold prices could benefit the Indian economy as it will help reduce the country’s CAD. It is also a sign that the US economy is doing well,which is good for global growth prospects. The fall in prices of other commodities,including crude oil,will help cut our import bill,” said DK Joshi,chief economist at Crisil.

Having tumbled to as low as $1,384.69 an ounce earlier on Monday,spot gold clawed back some gains but still lost almost 5% by 1230 GMT at $1,415 an ounce – its lowest since March 2011. Reinforcing the scepticism about the gold’s bull run in 2013,Goldman Sachs has forecast the precious metal would end the year at $1,450 an ounce,trimming its projection from $1,600 at the end of February and $1,810 prior to that. It expects gold to fall further to $1,270 an ounce by end-2014.

The precious metal is now more than 26% below the record peak of $1,920.30 an ounce hit in September 2011 after the US was downgraded by rating agency Standard & Poor’s,amid widespread apprehensions that gold may end its 12-year bull run in 2013.

“We see risks to current prices as skewed to the downside as we move through 2013. In fact,should our expectation for lower gold prices continue to prove correct,the fall in prices could end up being faster and larger than our forecast,” Goldman said.

Gold is often considered a safe-haven asset in times of economic uncertainty and a hedge against inflation. Considering the US Federal Reserve has been purchasing $85 billion a month in treasuries and mortgage-backed securities to stimulate the economy,the precious metal would do well in this type of environment.

But funds started pulling out of the bullion market after the minutes of a Fed meeting,released last week,revealed officials were actively engaged in a debate about whether to begin winding down the bond buying programme in the second half of the year. Cyprus’ decision to sell gold to mop up around 400 million euros to help fix its finances also sparked suggestions that larger countries in the region could use the move to cash in on some huge jumps gold has seen over the last decade. This aided a further slump in the precious metal.

“Despite the resurgence in euro area risk aversion and disappointing US economic data,gold prices are unchanged over the past month,highlighting how conviction in holding gold is quickly waning,” Goldman analysts said. “With our economists expecting few ramifications from Cyprus and that the recent US slowdown will not derail the faster recovery they forecast in 2H13,we believe a sharp rebound in gold prices is unlikely.”

The fact that US inflation remained at reasonable levels despite the quantitative easing,also contributed to the fading attraction of gold,analysts said.

By the end of March,gold had dropped 10% in six months and witnessed back-to-back quarterly declines for the first time since 2001.

“Fears of a Cyprus gold sale,liquidations in ETFs and unwinding of long positions by institutions in international markets have contributed to the downfall. The prospects of any meaningful recovery in gold remain weak and given the lack of any major triggers in the near term,gold prices are unlikely to reverse the downtrend anytime soon. Short-term pullbacks are entirely possible given the speed at which prices have declined towards 27,300-levels,but would only consolidate before a further fall. We anticipate another 12-15% fall from here on domestic markets before the end of FY14,” said Kishore Narne,head of commodities at Motilal Oswal Securities.